Conclusions and recommendations
1. We
conclude that the FCO is one of the major departmental losers
in the Spending Review, certainly compared to the MOD and DFID,
although we note that the 'core FCO' function has to some degree
been shielded from the full ferocity of the cuts falling on the
overall 'FCO family' budget, with a greater share of the pain
being borne by the other 'family' members, the British Council
and the BBC World Service. While it is not realistic to suppose
that the FCO can be insulated from the need to scale back its
spending and activities, in the context of the spending cuts being
imposed across the entire public sector, we have particular concerns
about its Spending Review settlement. (Paragraph 24)
2. We conclude that
reductions in spending on the FCO, if they result in shortfalls
in skilled personnel and technical support in key countries and
regions, can have a serious effect in terms of the UK's relations
with other countries, out of all proportion to the amounts of
money involved, especially in relation to the UK's security and
that of its Overseas Territories. It follows that cuts to the
core FCO budget even of 10% may have a very damaging effect on
the Department's ability to promote UK interests overseas, given
that these will come on top of previous cuts to the FCO's budget
in the very recent past, which our predecessor Committee described,
as recently as March 2010, as "unacceptably disrupting and
curtailing" the Department's work and representing a threat
to its effectiveness. We further conclude that the Spending Review
settlement will accentuate the regrettable long-term trend for
the FCO to lose out relative to other departments and agencies
in the allocation of government spending. (Paragraph 25)
3. We conclude that
the 25% and 16% real-terms cuts to the budgets of the British
Council and BBC World Service respectively will pose severe challenges
to those two organisations. We note the FCO's arguments for redressing
the balance of spending between the core FCO and the rest of the
FCO family, in favour of the former, but we share the concerns
that are likely to be felt in both the British Council and the
World Service about the implications of the decision. (Paragraph
26)
4. We conclude that
cuts of 50% in the FCO's capital spending will severely impact
on the Department's estates management. As priority for the remaining
money will quite rightly be given to much-needed improvements
to overseas security, the likelihood is that 'routine' modernisation
and upgrading to Embassy premises will largely be put on hold
for the four years of the Spending Review period. (Paragraph 34)
5. We further conclude
that the target of raising about £50 million per year for
the capital budget through selling existing buildings may be difficult
to achieve, and may not secure savings in the long-term. This
target may create an unwelcome incentive to sell historic or prestigious
buildings which have a potential long-term value to the FCO greater
than any immediate monetary benefit likely to accrue from their
sale. (Paragraph 35)
6. We recommend that
the FCO, in its response to this Report, should supply us with
a list of overseas properties which it proposes either to modernise
or sell, updated to reflect the changed circumstances following
the SR2010 settlement. (Paragraph 36)
7. We conclude that
the FCO's 'localisation' policy has brought benefits, but we do
not believe that it is capable of indefinite extension. A further
reduction in the opportunities for more junior UK-based staff
to serve in overseas posts, and a consequent diminishing of experience
and morale among FCO employees, will over time have a damaging
effect on the quality of British diplomacy and the effectiveness
of the FCO. (Paragraph 46)
8. We recommend that
in its response to this Report, the FCO should supply updated
information on its localisation policy. This should include a
list of all overseas Posts, giving in each case the ratio of UK-based
staff to locally engaged staff as it (a) was five years ago, (b)
is currently, and (c) is expected to be in any future years for
which projections have been made. We further recommend that the
FCO should explain how decisions to localise jobs are made in
individual cases, and what steps are taken to ensure that these
individual decisions reflect the FCO's overall strategic need
to retain a suitably sized pool of staff with overseas experience.
(Paragraph 47)
9. We recommend that,
in its response to this Report, the Government should supply us
with an assessment of how the future development of the European
External Action Service is likely to impact on the work of the
UK's global network of Posts. We further recommend that the Government
should reconfirm the undertaking given by the previous Government
to our predecessor Committee in April 2010 that "the establishment
of the EEAS will not lead to our Embassies being replaced with
Union Delegations". (Paragraph 55)
10. We conclude that
the introduction of the Foreign Pricing Mechanism is a welcome
step. However, we are concerned that the new mechanism does not
make allowance for differential inflation rates and may leave
the FCO's budgets prey to steep inflation in other countries.
We recommend that the FCO keep the operation of the new system
under close review, and that if differential exchange rates entail
significant losses to its budget, it should seek to reopen negotiations
with the Treasury over amending the FPM to include some degree
of compensation for this. (Paragraph 60)
11. We conclude that,
while the Government's commitment to meet the long-standing international
obligation to spend 0.7% of gross national income on Overseas
Development Assistance is welcome, there is a danger that 'reclassification'
provides a cover for meeting the 0.7% of GNI target without increasing
the money actually spent on ODA. (Paragraph 68)
12. We recommend that,
in its response to this Report, the FCO should give us a detailed
breakdown of items of Departmental expenditure which it is proposed
to reclassify as ODA, indicating in each case why they were not
previously so classified, and noting whether the OECD and DFID
have approved the reclassification. (Paragraph 69)
13. We conclude that
the removal of the funding of peacekeeping operations from the
FCO's baseline is a welcome development, one which will reduce
the overall financial risks faced by the Department. We recommend
that in its response to this Report, the FCO should supply a detailed
breakdown of the FCO's latest allocation from the Conflict Pool
and the uses to which it will be put; and that it should also
supply us with its latest estimate of the extent to which the
budget for peacekeeping operations will need to be 'topped up'
from the Conflict Pool. (Paragraph 73)
14. We conclude that
the British Council faces great strain on its budget over the
next four years. A 25% reduction over this period may well trigger
some fundamental rethinking of the role and work of the Council.
We appreciate that the Council, like other public-sector bodies,
has had very little time to prepare its response to proposed reductions
in expenditure. Nonetheless, we note that there was a lack of
clarity from our British Council witnesses on the important issue
of whether cuts would necessarily entail service reductions. It
is difficult to conceive that some service reductions will not
be necessary. We further conclude that the extent to which the
British Council can maintain anything like its current levels
of service and geographic coverage will depend on its ability
to increase its income from commercial activity and partnership.
That in turn will entail a difficult balancing act in which the
Council must seek to maximise its income from the sale of English
language teaching and other services, whilst not compromising
over the pursuit of its primary purpose, to "build engagement
and trust for the UK through the exchange of knowledge and ideas
between people worldwide". (Paragraph 85)
15. We recommend that
in its response to this Report, the British Council should supply
us with a report on the progress it has made towards developing
a detailed strategy for implementing the overall 25% cut, including
details of further staff reductions and of the measures it has
taken to ensure that the British Council's unique 'brand' will
not be damaged by this strategy. (Paragraph 86)
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